How to think about Web3 incentives
A framework for leveraging token incentives for consumer adoption
Ownership has taken center stage in the argument for constructing a user-centric internet, often dubbed as Web 3.0. In fact, the notion of creating shared value and incentivized engagement was what appealed to me the most when I first began exploring the varying aspects of Web3.
Users, fans or consumers – however they define themselves – have historically received the short end of the stick. Though they are critical to the consumption-driven economy, they seldom receive fair rewards for their time and emotional contributions to the ecosystem.
In comes Web3 as an idealistic solution to empower communities and their users to establish their own self-sustaining economies. Collective ownership and governance represented by digital tokens promised the benefits of shared value generation and incentivized participation. Token incentives have the power to drive tangible short-term growth in the form of user count, total value locked (TVL) or transaction volume. However, these blanket metrics do not necessarily translate into long-term sustainable growth.
In this piece, I’ll talk about the challenges with Web3’s current token incentive strategies and provide perspective on how to design sustainable incentive programs.
The challenge with token incentives
Blur Marketplace provides a telling example of the complexities associated with token-based incentives. Despite launching at the end of the 2022 bear market, this VC-backed NFT platform was still able to excite and attract significant trading activity. Their GTM launch strategy of distributing an undisclosed amount of airdrop tokens to NFT traders drove a speculative craze that immediately stole a chunk of market share from established player, OpenSea.
However, its apparent success was actually masking the platform’s fragile tokenomics. The airdrop campaign succeeded in driving platform growth, but it was also riddled with mercenary users, often called airdrop farmers, artificially inflating trading metrics through bidding incentives. As a result, a significant portion of $BLUR tokens has ended up in the hands of individuals more interested in flipping quick profits than genuinely wanting to participate in the platform’s growth.
Today, $BLUR has dropped over 85% in value, leaving farmers at a significant loss. The prevailing worry is that as Blur prepares for its season 2 airdrop, farmers will cut their losses and nuke on the market which will leave a trickle effect across the board.
And apparently, old habits die hard. The recent craze with Friend.Tech, the SocialFi platform, bears a very similar resemblance to Blur’s initial path of growth.
Needless to say, it’s clear that offering ownership and token rewards do not necessarily translate to users with high lifetime value (LTV). So how should projects think about launching incentivized programs?
A framework for gamified incentives
In the grand scheme of things, we're not reinventing the wheel as we develop Web3 products. The same is true for marketing and growth strategies. When we look at Web2 loyalty or reward programs, the depth of an individual's commitment to a brand often correlates to the abstractness of the incentives they seek.
In other words, as users become more genuinely committed to a brand, their incentive motivations evolve into something less tangible. Look at brands like Nike, Apple or Tesla - the strength of their brands is rooted in a sense of belonging, purpose, or shared values.
Web3 incentives follow the same framework as Web2 - the more committed a user is, the more abstract the incentive that matters to them becomes. So while token rewards can drive up metrics in the short term, they only mark the initial step toward user loyalty and commitment.
1/ Tangible incentive motive: I want immediate, concrete rewards.
2/ Obscure incentive motive: I believe that there could be future value, therefore I will put in more effort.
3/ Intrinsic incentive motive: I believe that there is value beyond the tangible metrics.
In the case of Friend.Tech, the platform is already struggling to move beyond the tangible rewards it offers. Within two weeks of launch, F.T has already declined nearly 95% in transaction volume from its all-time high.
Like many other social platforms, F.T favors the top 1% of creators. Users who already have an audience on Twitter/X, or elsewhere, will bring their followers to F.T and capture a majority of the revenue fees. While the top 1% enjoys the financial incentives and social status, this leaves out the large majority of users who are stuck chasing purely speculative rewards.
For the F.T airdrop to succeed without users dumping, F.T needs to create an environment that fosters the growth of all users. Unique features that empower lower-to-middle class creators to be discovered and grow their social status can create a sense of psychological attachment that transcends financial motives.
Li Jin writes a great piece on what Web3 projects can learn from Web2 on building a sense of “mineness” over products and services.
“But simply giving users tokens isn’t enough; users need to feel like owners in order to be aligned with the success of those networks, contribute to their growth, and stay engaged long-term.” - Building Psychological Attachment — Not Just Ownership — Into Web3
Another aspect to consider when launching tokenized incentives is the timing and purpose of it. As we’ve seen, token airdrops have been popularly used as a GTM tool for new projects. It creates hype to attract initial users (though they may not be high-quality) and can help bootstrap projects.
However, instead of using token incentives as a mass-acquisition tool, we should consider looking at it more as a strategy for retention and nurture. This means launching incentivized rewards only after proving that there is value and demand for the product and distributing rewards in multiple, smaller drops.
Is it a slower path to growth? Likely. But you would have better control in ensuring that you are on a sustainable and organic path to growth that outlasts hype and transitory usage.
Closing thoughts
In the current landscape, the reality is that speculation reigns as the dominant use case in Web3. It grabs the most attention and engagement, but it's important to recognize that it's not a sustainable foundation for Web3 projects.
We should view speculation and hype as valuable tools in the Web3 toolkit, but they shouldn't overshadow the core product offering. However, many Web3 projects are placing speculation at the forefront as its main product value, which is why the industry continues to be viewed as a casino.
For long-term success, projects need to demonstrate that they offer value beyond tangible financial incentives. They must introduce features and benefits that cater to all user classes, provide opportunities for user wallet growth and offer intrinsic value.
Hopefully, as more Web3 projects find product-market fit, speculation will become a feature, not a bug, which is what it unfortunately feels like right now.
Additional Readings
Building Psychological Attachment — Not Just Ownership — Into Web3 - By
Rethinking token incentives for consumer adoption - By Web3PM
The Ownership Economy - By Variant Fund